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Calvo Wages Vs. Search Frictions: a Horse Race in a DSGE Model of a Small Open Economy

Listed author(s):
  • Markus Kirchner
  • Rodrigo Tranamil

Most existing DSGE models used for monetary policy analysis and forecasting assume that the labor market always clears at a sticky nominal wage (`a la Calvo) through variations along the intensive margin of labor supply (i.e. hours), with no role for the extensive margin (i.e. employment). The latter contrasts with research on the macroeconomics of labor markets that has emphasized the relevance of the extensive margin and employment fluctuations using search and matching theory. Against this background, in this paper we conduct a horse race of a labor market specification with Calvo wages versus a search and matching specification with endogenous separations in an otherwise standard New Keynesian small open economy model, estimated with Chilean data. We conclude that the search and matching specification “wins” by a wide margin as it significantly improves the model’s ability to explain and predict both labor market data and other macroeconomic variables

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 778.

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Date of creation: Feb 2016
Handle: RePEc:chb:bcchwp:778
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  1. Emine Boz & C. Bora Durdu & Nan Li, 2015. "Emerging Market Business Cycles: The Role of Labor Market Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 31-72, 02.
  2. Julien Albertini & Güneş Kamber & Michael Kirker, 2012. "Estimated Small Open Economy Model With Frictional Unemployment," Pacific Economic Review, Wiley Blackwell, vol. 17(2), pages 326-353, 05.
  3. Kai Christoffel & James Costain & Gregory de Walque & Keith Kuester & Tobias Linzert & Stephen Millard & Olivier Pierrard, 2009. "Wage, inflation and employment dynamics with labour market matching," Working Papers 0918, Banco de España;Working Papers Homepage.
  4. José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.
  5. Frank Smets & Kai Christoffel & Günter Coenen & Roberto Motto & Massimo Rostagno, 2010. "DSGE models and their use at the ECB," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(1), pages 51-65, March.
  6. Juan Pablo Medina & Alberto Naudon, 2012. "Labor Market Dynamic in Chile:The Role of the Terms of Trade," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 15(1), pages 32-75, April.
  7. Javier García-Cicco & Markus Kirchner & Santiago Justel, 2015. "Domestic Financial Frictions and the Transmission of Foreign Shocks in Chile," Central Banking, Analysis, and Economic Policies Book Series,in: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.), Global Liquidity, Spillovers to Emerging Markets and Policy Responses, edition 1, volume 20, chapter 6, pages 159-222 Central Bank of Chile.
  8. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
  9. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.
  10. Tortorice, Daniel L., 2013. "Endogenous separation, wage rigidity and the dynamics of unemployment," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 179-191.
  11. repec:sbe:breart:v:35:y:2015:i:2:a:57573 is not listed on IDEAS
  12. Castro, Marcos R. de & Gouvea, Solange N. & Minella, Andre & Santos, Rafael & Souza-Sobrinho, Nelson F., 2015. "SAMBA: Stochastic Analytical Model with a Bayesian Approach," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 35(2), March.
  13. Kirdan Lees, 2009. "Introducing KITT: The Reserve Bank of New Zealand new DSGE model for forecasting and policy design," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 5-20, June.
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